Irving Picard is now going after various Fairfield Greenwich entities as well as many of its principals personally. He believes they were in on the Madoff scam, or at least knew it was happening. I agree with this - sort of.
Fairfield's due diligence was, indeed a joke. I blogged about this in detail here:
But I am quite convinced that the executives at Fairfield didn't suspect that Madoff was running a Ponzi. I believe they thought he was running a different sort of scam, one known as front running.
Madoff also owned a reasonably successful brokerage firm, which meant he was dealing with a lot of order flow. Front running involves trading in front of your clients, and it is quite illegal. It would have enabled Madoff to provide the incredibly consistent returns that he did simply by crediting over profitable trades (to his investment arm) as he needed them. There had been talk around the Street for years that this was going on. I had heard it myself, and clearly Fairfield did as well.
Think about the difference. In a Ponzi, the game always ends, and the money is gone. Fairfield would have known their doom was inevitable, and nothing about their behavior suggests this. On the other hand, if Madoff had been running a front-running scheme, the money would have been real, and the risk entirely Madoff's. If the SEC had come along and busted him, presumably Fairfield would have pleaded ignorance, gone home with their assets (less, possibly, an SEC haircut), and not shared in culpability. This explains why they hardly ever did any due diligence on Madoff. They didn't want to know anything. They needed plausible deniability.
When the true nature of the scam became known, it must have rivaled history's great "Oh, crap" moments.
There is one other Fairfield matter that seems to have escaped the regulators, which is their close relationship with Union Bancaire Privée, a Swiss bank that had its own Madoff feeder fund. Apparently, three of Fairfield’s other funds-of-funds - the ones that theoretically had nothing to do with Madoff - had money in this feeder. Huh? Fairfield had direct access to Madoff, so why would it pay someone else for access? One guess is that it was some kind of quid quo pro arrangement; Fairfield and Bank Privée did business on a number of levels, so perhaps they were getting a fee break somewhere else, perhaps on advisory services their management company was receiving from Privee. This, in effect, clips client returns and re-directs the money to Fairfield management. Very bad.
Another possibility is that this was a way to quietly channel money to Madoff from other Fairfield funds without letting this fact be completely clear to investors (i.e. ones that had possibly taken a pass on the direct Madoff feeder). Also very bad.